December Jobs Report: What to Expect

WASHINGTON ( TheStreet) -- Will the December jobs report surprise the markets?

A strong ADP report on private sector job growth Wednesday has certainly set up expectations for a big number. Companies added 297,000 jobs in December, according to the latest ADP National Employment Report. That was nearly three times higher than the 100,000 jobs economists were expecting.

On Thursday, the Labor Department said initial weekly claims rose to 409,000 . But the overall trend has been down in the last several weeks, lifting hopes that layoffs were beginning to let up.

Still, economists maintain a more modest estimate for hiring growth, as the ADP report has been known to widely diverge from that of the Bureau of Labor Statistics (BLS). Economists expect the economy to have added 150,000 jobs in December, according to median consensus estimates available on Bloomberg as of Thursday morning. That is up from 135,000 ahead of the ADP report. Estimates will continue to be revised in the run-up to the report but largely ranged from as low as 98,000 to 240,000 on the higher end.

So what will it take to move the needle on Friday? John Canally of LPL Financial believes that a figure closer to the upper end of estimates, "something north of 215,000," will probably satisfy the market. An upward revision in the November jobs estimates would provide a further boost to sentiment.

A weaker-than-expected November jobs report cast doubts on the recovery story last month, confounding experts who had forecast a stronger number amid evidence of an uptick in other areas of the economy.

According to Patrick O'Keefe, director of economic research at audit firm J.H. Cohn and a former deputy assistant secretary in the Department of Labor, there are reasons to believe the November report was just a blip. Not only did the latest ADP report point to a stronger recovery in the jobs market, but the November report probably underestimated retail employment significantly.

"Retail employment dropped in November, which is atypical for that time of the year," said O'Keefe. "The proportion of retail sales by e-tailing reached a record. But to have a negative month-to-month figure was certainly anomalous. The number was unduly weak, and the seasonal adjustment factors may have overshot," he said.

Macy's ( M), Amazon ( AMZN), Kohl's ( KSS) and Best Buy ( BBY) were among those who said they would be hiring for the holiday season.

O'Keefe expects the BLS report to show either an upward revision in the November jobs estimate or a greater-than-expected improvement in retail employment.

Still, with recovery expectations largely baked in, markets will be looking past the overall figure at another metric that has been stubbornly high throughout the recession: the unemployment rate.

Economists expect the rate to edge lower to 9.7%, according to consensus expectations from Briefing.com. But a spike in the unemployment rate may not be that unexpected and, in fact, is probably inevitable in a recovering jobs market.

The unemployment rate counts only those workers who are actively seeking jobs. It does not count discouraged workers -- those who want and are available for work but have not sought a job in the last four weeks. As the economy recovers and more job openings are created, previously discouraged workers start applying for jobs and start to get included in the unemployment count.

There were 1.3 million discouraged workers in November, according to the household survey, all of whom could potentially re-enter the workforce as the economy recovers.

"I won't be surprised to see the unemployment rate above 9% in 2011, assuming strong growth in the second half," says TC Robillard of Signal Hill Capital, who covers staffing companies. "The unemployment rate is definitely a number that the average citizen watches, and that all funnels into the consumer-driven economy. But it is not the most important factor."

Still, the unemployment rate will likely get its fair share of attention on Friday, as it remains a key concern for the Federal Reserve. The central bank has indicated that it will continue its $600 billion quantitative easing program as unemployment levels remain uncomfortably high and inflation remains subdued.

Robillard says investors should focus on the overall trend in the coming months rather than the actual number. "The volatility in the month-to-month figures must be taken with a grain of salt." he said. "The big focal point will be the consistency in the positive job creation month to month. As we start to get to the second half of the year, the numbers will gain momentum. That is when we should look at the absolute numbers."

O'Keefe says investors should watch out for a drop or slowdown in temporary hiring. "Temporary help hires account for 2% of all private sector employment, but ... has accounted for 25% of all net new private sector jobs (since the recession began)," says the economist.

Companies have been hiring temporary workers to meet the needs of recovering demand, as they have not been confident enough about the recovery to make permanent hires. "If we see a reduction in temporary hires or if temporary hires remain flat while everything else ticks up that would mean that companies are willing to move on from dating and get married," says O'Keefe.

Another factor the analyst will focus on will be the number of individuals underemployed. A reduction in the number would mean employees are working more hours and are getting paid more, all necessary for consumer confidence to improve.